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January 20, 2006

The Return of the Full Service Broker/Dealer?

Spectrem Group study says yes, but...

Full service broker dealers are regaining favor among affluent investors, according to the Spectrem Affluent Study 2005. But even as the Chicago-based Spectrem Group's study shows that more affluent investors are using full-service brokers as their "primary advisor," the study reports that the affluent are more satisfied overall with their financial planners, investment advisors and investment managers, than with brokers.

While the percentage of affluent investors who use full service brokers as their primary advisor--31% in 2005--has been climbing back from a low point in 2004 of 24%, they are not yet back to the 2002 level of 45%.

So, why did the numbers decline in the first place? The results over the years show that "affluent investors are influenced somewhat in their thinking by how the market is performing," says Spectrem Group's President, George H. Walper, Jr. After a few tough years, with the market now trending upward "they're a little more comfortable using brokers as advisors." He adds that in their research about Ultra High New Worth investors, defined as those who have investable assets of $5 million and above, "we see that that industry as a whole has really done some significant enhancements to their product offerings, far more of them are advice-based as opposed to strictly talking about product, so that industry has recognized that they had to change from the '90s when they were the dominant player. They haven't fully recovered, but they clearly have reversed the trend."

But the market's recovery doesn't fully explain why the affluent are going back to full-service brokers. Partly, Walper says, it's that there is less press now about conflicts of interest and scandals within the brokerage industry. "It's a combination of the market trending back upward, combined with the [fact that] industry hasn't had any conflict issues that it had back in 2001 and 2002, so the issue of trusting these folks as an advisor and using them has become neutralized." Full service firms have also become more tuned in to what customers want, with wider ranges of non-proprietary products and more fee-based programs: "I think a lot of it is [full-service firms] being responsive to their customers in the market."

However, Walper says, "we do see that fee based advisors--regardless of financial planner or investment advisor--have consistently in the last three or four years had a much higher degree of satisfaction than brokers, in terms of their clients' evaluation of them, so there is still a challenge in the industry.

Spectrem Group has conducted this study since 1996. This year they interviewed 1014 households that qualified as "affluent" by having at least $500,000 of investable assets, during the last quarter of 2005. There is a margin of error of plus or minus 3.1 percentage points.